The world was surprised as Mr. Trump’s victory became evident on the eve of November 8th. Global markets swooned only to recover at the prospect of Mr. Trump’s vow to spend heavily on infrastructure and reduce regulation. The most significant move was the increase in interest rates as the U.S. ten year note moved from 1.85% to 2.21%, as of this writing. Keep in mind, interest rates change, but the reason you own bonds does not.
The anticipated spending (i.e. fiscal stimulus) is causing a repricing of assets across the board. Stocks surged and bond prices fell, so what does the future hold?
It is difficult to know for sure, but most pundits predict rising interest rates and corporate profits that will benefit from massive government spending. Contrarians say that if interest rates rise too much, it may reduce the multiple of the price to earnings ratio of common equities. This will be the “Ying” and “Yang” over the next six months.
Even though in the long term, fundamentals determine success, current events can shift trajectories. As prudent investors, it would have been risky to assume the outcome of a Clinton/Trump race. Indeed, very different outcomes were predicted. That is why we maintained short to medium duration in our bond portfolios, and stock portfolios focused on dividend-paying large enterprises.
Adjusting portfolios to the new paradigm is an evolutionary process and must be done with care and diligence. Notwithstanding all of these factors, market dynamics have changed, and all of us must adapt. Over the past 7 years, as short term interest rates have hovered around zero, the pricing of investment risk has increased, causing many to flee into low yielding assets for safety. With the incoming Trump administration, this may change and savers may once again be rewarded for their investments. The flip side is that if interest rates rise too high and too fast, they may dampen mortgage lending and slow consumer spending. We are adjusting our thinking as policy decisions unfold and market dynamics change.
Many of you will hear from your advisor at Family Management about the changes we see and how we plan to navigate for you individually. As guardians of your wealth, the last few years have been extremely challenging as we have looked to make reasonable returns on a risk adjusted basis.
With interest rates moving up, albeit slowly, we hope that we can continue to preserve and augment your wealth with new ideas and innovative thinking.
Thank you again for your confidence and trust.
Have a wonderful holiday season.
Seymour W. Zises